Materiality (auditing) - Materiality in Governmental Auditing

Materiality in Governmental Auditing

Materiality in governmental auditing is different from materiality in private sector auditing for several reasons.

Most importantly, due to the format of state and local government financial statements under GAAP, the AICPA Audit Guide for State and Local Governments requires auditors to consider materiality by "opinion unit" rather than for the financial statements taken as a whole. The Guide defines opinion units as follows:

Government-wide level (three units):

1. Governmental activities;

2. Business type activities; and

3. Discretely presented component units in the aggregate.

Fund level (at least two):

1. General fund (always a major fund);

2. Other major funds determined for government funds or enterprise funds. Each major fund is an opinion unit. If there are no major funds, then there will be only two opinion units—the general fund and the remaining fund information; and

3. Remaining fund information, consisting of all other nonmajor governmental and enterprise funds, internal service fund type, and fiduciary fund type. (This will generally always be present, although the individual components and size will change between governmental entities.)

This functionally decreases materiality for state and local government financial statements by an order of magnitude compared to materiality for private company financial statements. Due to the unique concept of materiality, the auditor's report expresses an opinion in relation to each opinion unit.

Moreover, the primary users of government financial statements are different: the citizenry and the parliament in the public sector versus investors in the private sector. It is important to identify the primary users since materiality reflects the auditor’s judgment of the needs of users in relation to the information in the financial statements.

Finally, in government auditing, the political sensitivity to adverse media exposure often concerns the nature rather than the size of an amount, such as illegal acts, bribery, corruption and related party transactions. Qualitative considerations of materiality are therefore different than in private sector auditing, in which qualitative considerations are focused on the effect on earnings-per-share, executive bonuses or other risks that are not applicable to governments. Qualitative materiality refers to the nature of a transaction or amount and includes many financial and non financial items that, independent of the amount, may influence the decisions of a user of the financial statements.

While rules of thumb mentioned in the section above are commonly applied to state and local government financial statements, government auditors may also use different means to quantify materiality such as total cost or net cost (expenses less revenues or expenditure less receipts). In a cash accounting environment, total expenditures is often used as a benchmark.